Canada: Estate Planning For The Family Cottage…It's Complicated

Last Updated: December 18 2018
Article by J. Allison Barkwell

Estate planning is not an easy task, as families are complicated.  The general goal of most people when they are estate planning is to create fairness amongst their beneficiaries.  This is easiest to do when cash is being divided.  For example, when all of the assets are sold and the debts, including taxes, are paid, then what is left-over can be easily divided in accordance with the terms of the deceased's Will.

However, if the testator (person making the Will) owns a family cottage that has been in the family for several years, some of the beneficiaries might not want it to be sold and would like to continue using it as they always have. If the Will does not specify what happens to the cottage, the personal representative could suddenly have a beneficiary dispute on his or her hands. The example set out below highlights some of the issues and factors to be taken into consideration when a person's estate includes a family cottage.

Ms. Dobby's Cottage at Voldemort Lake

Ms. Dobby is 70 years old.  She has owned a cottage at Voldemort Lake for the past 40 years.  She purchased the cottage for $150,000 and it is now worth $1,500,000.00.  Ms. Dobby was in a second marriage with Mr. Potter. Mr. Potter passed away two years ago. The two of them had been married for 23 years at the time of his death.  Ms. Dobby has two children from her first marriage, Hermione who is 45 and Draco who is 41.  Mr. Potter had two children from his first marriage, Ginny who is 42 and Albus who is 38.

The entire blended family has been using the cottage for the last 25 years.  Each summer all of the children spend a few weeks there with their own children.  For the past 40 years, Ms. Dobby has been paying all of the operating expenses for the cottage.  Ms. Dobby estimates the cost of operating the cottage on an annual basis is about $40,000.00, and this does not include the cost of any improvements she has made to the property over the last 40 years.

Ms. Dobby has spoken to the family and asked what they would like to happen to the cottage after she passes away.  All of the children have said they would like to continue using it as they are currently using it.

Tax Implications

Upon Ms. Dobby's death, Ms. Dobby is deemed to have sold all of her assets at fair market value.  This includes the cottage at Voldemort Lake.  There has been an increase in value of $1,350,000.00 since Ms. Dobby purchased the cottage, and accordingly, capital gains tax is payable on this increase in value. The tax payable is based on 50% of the increase in value being $675,000.00.  The tax payable on the cottage would be approximately $337,500.00.  This would need to be paid by April 30 of the following year.  Where would this money come from?

Depending on the value of Ms. Dobby's primary residence and how long she has owned that property, there may be an opportunity to designate the cottage as her primary residence and reduce the capital gains tax payable, through the use of the principal residence exemption.

Other Financial Considerations

The cottage is an older property and Ms. Dobby is aware of some improvements that will need to be made over the next few years. This includes a new roof and a new boat dock. In addition, she would like to purchase a new boat as all the grandchildren like wakeboarding and waterskiing. Ms. Dobby is not sure what the cost of these improvements and the boat will be.  If the property is transferred to all of the children equally, how will they decide who pays for the improvements to the property?  How will they decide when the improvements are made?  What if one of the children is unable to pay the costs of the improvements?  These issues can create significant issues between the children if they are unable to agree.

In addition to the improvement costs, how are the annual operating costs to be paid after Ms. Dobby's death? Can each of the children afford to pay a share of the annual operating costs?

Fairness and Other Issues

As this is a second marriage for Ms. Dobby, does she want both her children and Mr. Potter's children to receive equal amounts of her estate?  If she does not leave the cottage to all four children equally, will this cause the children to not get along in the future?  In her Will, does Ms. Dobby give more to her children and less to Mr. Potter's children?  Will this create issues amongst the four children?

What if Albus initially wants a share of the cottage but later moves away?  Would the three other children be able to purchase Albus' share?  How do they determine the fair market value?  Do the other three children need to obtain a mortgage on the property or can they buy-out Albus over a period of time?

During Ms. Dobby's lifetime, she has been arranging the scheduling of the cottage for all of the children and the grandchildren.  How will the scheduling be determined after she has passed away?  What if Draco spends several weeks at the cottage and Ginny is only able to spend a few days there?  Does this change how the operating costs are to be paid?

Conclusion

As you can see, family cottages raise many complex issues that require careful consideration in estate planning.  At Miller Thomson, we have significant experience with estate planning and planning for individuals with secondary properties.  We would be pleased to navigate you through the tax, financial and other considerations and assist in planning to prevent any disputes amongst your beneficiaries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
J. Allison Barkwell
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions